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In times of market uncertainty, understanding and evaluating near-term investment opportunities is a worthy exercise. It’s also a great time to reflect on different investing styles and ensure you have a balanced approach that aligns with your investment goals. To get the conversation going, here are three questions, asked and answered.
Q1. How does Mr. Market teach us (investors) to make rational decisions during volatile times like now?
We aim to let Mr. Market serve us rather than inform us about business values. We view all of our investments through our proprietary Private Market Value, or PMV, with a catalyst lens, which Mario Gabelli is credited with adding to the value investing methodology. Our analysts are experts in their industries and are tasked with assigning a Private Market Value to a business. Put another way, PMV is what an informed buyer would be willing to pay for an entire business and then we identify catalysts, which will allow the company’s intrinsic value to be realized in the market. We demand a sufficient margin of safety for the companies we invest in and that’s where Mr. Market comes in. If Mr. Market serves us with an opportunity to purchase a company at a 30% discount to PMV, for example, on a day that the overall market or the company itself is down, we are able take advantage of that opportunity as long as the catalysts and company fundamentals remain intact. Alternatively, if Mr. Market gets exuberant and the market prices of a company reach its PMV and nothing has substantially changed within the value of the company or the relevant catalysts, we can use that opportunity to sell the position. We use the market volatility to opportunistically buy high quality companies at attractive prices.
Q2. What favors value investing during extreme market turbulence?
Our philosophy is rooted in fundamental, bottom-up research. We identify companies selling at substantial discounts to their Private Market Value which have potential catalysts to help surface that value. We will buy a security when it has a sufficient discount to its PMV. We utilize a three pronged approach focused on a company’s FCF, earnings & PMV regardless of the volatility in the overall market. Bottom line, we want to understand how external events that impact the market will impact earnings in the near term and how it will impact the trajectory of earnings long-term. For an exogenous, black swan type of event, like the impact of Coronavirus on the market, we understand that while earnings will surely be lower this year, we don’t see anything to suggest that this will continue in future years with an effect on the long-term earnings of a company and its earnings multiple. Our focus on the underlying value of the business helps us to avoid overreacting in these types of events as we are disciplined, long-term investors and are comfortable holding or buying companies that are out of favor in the short-term if they represent compelling opportunities over our long-term investment horizon.
Q3. Where does active management fit into the investing question?
Building on the previous questions, active investing allows us to make holistic and informed investment decisions based on all of the information gathered through our intensive research process. Our analysts are experts in their industries and not only compile information that is publicly available about a company, they also gather data points from meetings with company management, interviews with competitors and suppliers, etc. They then array the data in proprietary template, project it over a 5 year period and interpret the data. Finally they communicate it with other members of the investment team. This intensive fundamental approach allows us to thoughtfully frame investment decisions company by company rather than indiscriminate selling which occurs in passive investing. Our approach allows us to take a long-term view and purchase companies, which have catalysts in place regardless of the overall macro trends in the market. We construct portfolios from the bottom up in a way that makes us look different from any index Over a long period, we believe being idiosyncratic, relying on ideas that can generate positive returns regardless of economic conditions is the best way for us to add value for our clients.
